The Law Offices Of Ronny Buni

Re: Tax Break May Have Helped Cause Housing Bubble – NY Times

Posted on August 11th, 2009 by bunilaw

david– i just read your article about the cap gain exemption and have already spoken with vikas about my concerns that it doesn’t make a lot of sense.

there is little reason to believe that the change from the rollover provision in prior law (which exempted the gain on sale as long as reinvested in a new home) would lead to the kind of speculative selling and buying you and vikas discuss.

if we assume a uniform housing market we have to see that buying a new home comparable to the one we sold will require reinvesting the entire proceeds of sale. put differently, because on average the homes we sell appreciate at the same rate as the ones we buy, there is no pre-tax gain in selling and buying comparable homes. some people may have homes that are too large because kids move out, and the flat exemption provisions allow these folks to cash in on some of their equity when buying a smaller home without paying capital gains. but since you have to buy a smaller or less valuable home to do this, any incentive for buy/sell speculation of the sort you describe is negligible.

the purpose of the prior law rollover provision was to allow homeowners to make tax-neutral decisions about relocating. if you sold a $200k home in illinois, congress wanted to make sure the tax code wouldn’t be a reason you couldn’t buy a $200k home in ohio. the rollover provision did not address the problem of folks needing a smaller home later in life but defering sale to get a step-up in basis on death. as you and vikas discussed, congress addressed this with a one-time exemption. together, these provisions worked pretty well, and the rollover provision would provide the same economic benefits over time regardless of inflation.

in my view, the flat exemptions introduced in 97 are effectively a quiet phase-out of the exemption device because they are not indexed to inflation. for that reason alone i prefer the rollover provision. your criticism that the current exemption system requires record-keeping by the taxpayer is misplaced: records of capital improvements would have to be kept absent any exemption so the taxpayer can get credit for his full adjusted basis, and anyway records of major capital improvements are not difficult to maintain.

i do thank you for your sincere work on the article, but it gives a wrong impression. your editor did not help by suggesting the flat exemptions may have caused the housing bubble. i know the times has to sell papers, but that sort of claim is unjustified.

yours,
ronny buni
–
The Law Offices of Ronny Buni,
A Professional Corporation
817 Broadway, 5th Floor
New York, NY 10003
www.bunilaw.com

The Reckoning

Tax Break May Have Helped Cause Housing Bubble

By VIKAS BAJAJ and DAVID LEONHARDT

Published: December 19, 2008

A 1997 change that ended the capital gains tax on home sales was a new incentive to plow money into real estate.

Filed under: Tax Commentaries
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